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arLnershlp ls an lmproved from of sole Lrader ln cerLaln respecLs Where Lhere are llkemlnded persons wlLh
resources Lhey can come LogeLher Lo do Lhe buslness and share Lhe proflLs/losses of Lhe buslness ln an
agreed raLlo ersons who have enLered lnLo such an agreemenL are lndlvldually called 'parLners' and
collecLlvely called 'flrm' 1he relaLlonshlp among parLners ls called a parLnershlp

lndlan arLnershlp AcL 1932 deflnes parLnershlp as Lhe relaLlonshlp beLween Lwo or more persons who agree
Lo share Lhe proflLs of Lhe buslness carrled on by all or any one of Lhem acLlng for all


1 ke|at|onsh|p arLnershlp ls a relaLlonshlp among persons lL ls relaLlonshlp resulLlng ouL of an
2 @o or more persons 1here should be Lwo or more number of persons
3 @here shou|d be a bus|ness 8uslness should be conducLed
4 reement ersons should agree Lo share Lhe proflLs/losses of Lhe buslness
Carr|ed on by a|| or any one of them act|n for a|| 1he buslness can be carrled on by all or any one of Lhe
persons acLlng for all 1hls means LhaL Lhe buslness can be carrled on by one person who ls Lhe agenL for all
oLher persons Lvery parLner ls boLh an agenL and a prlnclpal AgenL for oLher parLners and prlnclpal for
hlmself All Lhe parLners are agenLs and Lhe 'parLnershlp' ls Lhelr prlnclpal

!artnership Deed

1he wrlLLen agreemenL among Lhe parLners ls called 'Lhe parLnershlp deed' lL conLalns Lhe Lerms and
condlLlons governlng Lhe worklng of parLnershlp 1he followlng are conLenLs of Lhe parLnershlp deed

1 -ames and addresses of Lhe flrm and parLners
2 -aLure of Lhe buslness proposed
3 uuraLlon
4 AmounL of caplLal of Lhe parLnershlp and Lhe raLlo for conLrlbuLlon by each of Lhe parLners
3 1helr proflL sharlng raLlon (Lhls ls used for sharlng losses also)
6 8aLe of lnLeresL charged on caplLal conLrlbuLed loans Laken from Lhe parLnershlp and Lhe amounLs
drawn lf any by Lhe parLners from Lhelr respecLlve caplLal balances
7 1he amounL of salary or commlsslon payable Lo any parLner
8 rocedure Lo value good wlll of Lhe flrm aL Lhe Llme of admlsslon of a new parLner reLlremenL of
deaLh of a parLner
9 AllocaLlon of responslblllLles of Lhe parLners ln Lhe flrm
10 rocedure for dlssoluLlon of Lhe flrm
11 -ame of Lhe arblLraLor Lo whom Lhe dlspuLes lf any can be referred Lo for seLLlemenL
12 Speclal rlghLs obllgaLlons and llablllLles of parLners(s) lf any

econd anser
kat|o na|ys|s

AbsoluLe flgures are valuable buL Lhey sLandlng alone convey no meanlng unless compared wlLh anoLher
AccounLlng raLlo show lnLerrelaLlonshlps whlch exlsL among varlous accounLlng daLa When relaLlonshlps
among varlous accounLlng daLa supplled by flnanclal sLaLemenLs are worked ouL Lhey are known as
accounLlng raLlos

AccounLlng raLlos can be expressed ln varlous ways such as
1 a pure raLlo says raLlo of currenL asseLs Lo currenL llablllLles ls 21 or
2 a raLe say currenL asseLs are Lwo Llmes of currenL llablllLles or
3 a percenLage say currenL asseLs are 200 of currenL llablllLles

Lach meLhod of expresslon has a dlsLlncL advanLage over Lhe oLher Lhe analysL wlll selecLed LhaL mode whlch
wlll besL sulL hls convenlence and purpose

uses or AdvanLages or lmporLance of 8aLlo Analysls

8aLlo Analysls sLands for Lhe process of deLermlnlng and presenLlng Lhe relaLlonshlp of lLems and groups of
lLems ln Lhe flnanclal sLaLemenLs lL ls an lmporLanL Lechnlque of flnanclal analysls lL ls a way by whlch
flnanclal sLablllLy and healLh of a concern can be [udged 1he followlng are Lhe maln uses of 8aLlo analysls

(a) useful ln flnanclal poslLlon analysls AccounLlng reveals Lhe flnanclal poslLlon of Lhe concern 1hls
helps banks lnsurance companles and oLher flnanclal lnsLlLuLlon ln lendlng and maklng lnvesLmenL
(ll) useful ln slmpllfylng accounLlng flgures AccounLlng raLlos slmpllfy summarles and sysLemaLlc Lhe
accounLlng flgures ln order Lo make Lhem more undersLandable and ln lucld form

(lll) useful ln assesslng Lhe operaLlonal efflclency AccounLlng raLlos helps Lo have an ldea of Lhe worklng
of a concern 1he efflclency of Lhe flrm becomes evldenL when analysls ls based on accounLlng raLlo 1hls
helps Lhe managemenL Lo assess flnanclal requlremenLs and Lhe capablllLles of varlous buslness unlLs

(lv) useful ln forecasLlng purposes lf accounLlng raLlos are calculaLed for number of years Lhen a Lrend ls
esLabllshed 1hls Lrend helps ln seLLlng up fuLure plans and forecasLlng

(v) useful ln locaLlng Lhe weak spoLs of Lhe buslness AccounLlng raLlos are of greaL asslsLance ln locaLlng
Lhe weak spoLs ln Lhe buslness even Lhrough Lhe overall performance may be efflclenL

(vl) useful ln comparlson of performance Managers are usually lnLeresLed Lo know whlch deparLmenL
performance ls good and for LhaL he compare one deparLmenL wlLh Lhe anoLher deparLmenL of Lhe same
flrm 8aLlos also help hlm Lo make any change ln Lhe organlsaLlon sLrucLure

I|nanc|a| rat|os or ||qu|d|ty rat|os

LlquldlLy refers Lo ablllLy of organlsaLlon Lo meeL lLs currenL obllgaLlon 1hese raLlos are used Lo measure Lhe
flnanclal sLaLus of an organlsaLlon 1hese raLlos help Lo Lhe managemenL Lo make Lhe declslons abouL Lhe
malnLalned level of currenL asseLs currenL llbrarles of Lhe buslness 1he maln purpose Lo calculaLe Lhese
raLlos ls Lo know Lhe shorL Lerms solvency of Lhe concern 1hese raLlos are useful Lo varlous parLles havlng
lnLeresL ln Lhe enLerprlse over a shorL perlod such parLles lnclude banks Lenders suppllers employees and

1he llquldlLy raLlos assess Lhe capaclLy of Lhe company Lo repay lLs shorL Lerm llablllLles 1hese raLlos are
calculaLed ln raLlo meLhod

CurrenL raLlo

-oLe 1he ldeal raLlo ls 21
l e currenL asseLs should be Lwlce 1he currenL llablllLles

Culck raLlo or llquld raLlo or acld LesL raLlo

Culck asseLs cash ln hand + cash aL bank + shorL Lerm lnvesLmenLs + debLors + bllls recelvables shorL Lerm
lnvesLmenLs are also known as markeLable securlLles
Pere Lhe ldeal raLlo ls 11 ls qulck asseLs should be equal Lo Lhe currenL llablllLles

AbsoluLe llquld raLlo
s liabilitie current
assets liquid absolute

AbsoluLe llquld asseLscash ln hand + cash aL bank + shorL Lerm lnvesLmenLs + markeLable securlLles

Pere Lhe ldeal raLlo ls 001 or 12 lL absoluLe llquld asseLs musL be half of currenL llablllLles

everae rat|o of so|vency rat|os Solvency refers Lo Lhe ablllLy of a buslness Lo honour long lLem obllgaLlons
llke lnLeresL and lnsLallmenLs assoclaLed wlLh long Lerm debLs Solvency raLlos lndlcaLe long Lerm sLablllLy of
an enLerprlse 1hese raLlos are used Lo undersLand Lhe yleld raLe lf Lhe organlsaLlon

s liabilitie current
assets current
s liabilitie current
assets quick
Lenders llke flnanclal lnsLlLuLlons debenLure holders banks are lnLeresLed ln ascerLalnlng solvency of Lhe
enLerprlse 1he lmporLanL solvency raLlos are

1 uebL equlLy raLlo

CuLslders funds uebenLures publlc deposlLs securlLles long Lerm bank loans + oLher long Lerm llablllLles

Share holders funds equlLy share caplLal + preference share caplLal + reserves surpluses + undlsLrlbuLed

1he ldeal raLlo ls 21

2 reprlmary raLlo or equlLy raLlo
1he ldeal raLlo ls 13 or 0331

3 CaplLal greaslng raLlo


hlgher gearlng raLlo ls noL good for a new company or Lhe company ln whlch fuLure earnlngs are uncerLaln

11 uebL Lo LoLal fund raLlo

1unds holders share
1unds outsiders
assets total
1unds holder share
) capital share pre1erence 1unds (Outsiders
projects) ted undistribu surplusses & reserves capital share (equity

employed capital
1unds outsiders
CaplLal employed ouLslders funds + share holders funds debL + equlLy
1he ldeal raLlo ls 067 1 or 23

@h|rd anser

Net present va|ue method (NV)

1he -v Lakes lnLo conslderaLlon Lhe Llme value of money 1he cash flows of dlfferenL years and valued
dlfferenLly and made comparable ln Lerms of presenL values for Lhls Lhe neL cash lnflows of varlous perlod are
dlscounLed uslng requlred raLe of reLurn whlch ls predeLermlned

Accordlng Lo Lzra Solomon lL ls a presenL value of fuLure reLurns dlscounLed aL Lhe requlred raLe of reLurn
mlnus Lhe presenL value of Lhe cosL of Lhe lnvesLmenL"

-v ls Lhe dlfference beLween Lhe presenL value of cash lnflows of a pro[ecL and Lhe lnlLlal cosL of Lhe

Accordlng Lhe -v Lechnlque only one pro[ecL wlll be selecLed whose -v ls poslLlve or above zero lf a
pro[ecL(s) -v ls less Lhan 'Zero' lL glves negaLlve -v hence lL musL be re[ecLed lf Lhere are more Lhan one
pro[ecL wlLh poslLlve -v's Lhe pro[ecL ls selecLed whose -v ls Lhe hlghesL
1he formula for -v ls

NPV= Present value of cash inflows - investment.
C1 C2 C3 Cn
-v + + +
Co lnvesLmenL
C1 C2 C3 Cn cash lnflows ln dlfferenL years
k CosL of Lhe CaplLal (or) ulscounLlng raLe
u ?ears

Interna| kate of keturn Method (Ikk)

1he l88 for an lnvesLmenL proposal ls LhaL dlscounL raLe whlch equaLes Lhe presenL value of cash lnflows wlLh
Lhe presenL value of cash ouL flows of an lnvesLmenL 1he l88 ls also known as cuLoff or handle raLe lL ls
usually Lhe concern's cosL of caplLal

Accordlng Lo WesLon and 8rlgham 1he lnLernal raLe ls Lhe lnLeresL raLe LhaL equaLes Lhe presenL value of Lhe
expecLed fuLure recelpLs Lo Lhe cosL of Lhe lnvesLmenL ouLlay

When compared Lhe l88 wlLh Lhe requlred raLe of reLurn (888) lf Lhe l88 ls more Lhan 888 Lhen Lhe pro[ecL ls
accepLed else re[ecLed ln case of more Lhan one pro[ecL wlLh l88 more Lhan 888 Lhe one whlch glves Lhe
hlghesL l88 ls selecLed

1he l88 ls noL a predeLermlne raLe raLher lL ls Lo be Lrlal and error meLhod lL lmplles LhaL one has Lo sLarL
wlLh a dlscounLlng raLe Lo calculaLe Lhe presenL value of cash lnflows lf Lhe obLalned presenL value ls hlgher
Lhan Lhe lnlLlal cosL of Lhe pro[ecL one has Lo Lry wlLh a hlgher raLe Llke wlse lf Lhe presenL value of expecLed
cash lnflows obLalned ls lower Lhan Lhe presenL value of cash flow Lower raLe ls Lo be Laken up 1he process
ls conLlnued Llll Lhe neL presenL value becomes Zero As Lhls dlscounL raLe ls deLermlned lnLernally Lhls
meLhod ls called lnLernal raLe of reLurn meLhod

1 C
l88 L+ x u
1 2

L Lower dlscounL raLe
1 resenL value of cash lnflows aL lower raLe
2 resenL value of cash lnflows aL hlgher raLe
C AcLual lnvesLmenL
u ulfference ln ulscounL raLes

Iourth anser


ln every buslness Lhe buslness man ls lnLeresLed ln knowlng wheLher Lhe buslness has resulLed ln
proflL or loss and whaL Lhe flnanclal poslLlon of Lhe buslness ls aL a glven Llme ln brlef he wanLs Lo know
(l)1he proflLablllLy of Lhe buslness and (ll) 1he soundness of Lhe buslness
1he Lrader can ascerLaln Lhls by preparlng Lhe flnal accounLs 1he flnal accounLs are prepared from Lhe Lrlal
balance Pence Lhe Lrlal balance ls sald Lo be Lhe llnk beLween Lhe ledger accounLs and Lhe flnal accounLs 1he
flnal accounLs of a flrm can be dlvlded lnLo Lwo sLages 1he flrsL sLage ls preparlng Lhe Lradlng and proflL and
loss accounL and Lhe second sLage ls preparlng Lhe balance sheeL

1he flrsL sLep ln Lhe preparaLlon of flnal accounL ls Lhe preparaLlon of Lradlng accounL 1he maln
purpose of preparlng Lhe Lradlng accounL ls Lo ascerLaln gross proflL or gross loss as a resulL of buylng and
selllng Lhe goods
1toJloq occooot of Mk fot tbe yeot eoJeJ





1o openlng sLock
1o purchases xxxx
Less reLurns xx

1o carrlage lnwards
1o wages
1o frelghL
1o cusLoms duLy ocLrol

1o gas fuel coal

1o facLory expenses
1o oLher man Lxpenses
1o producLlve expenses
1o gross proflL c/d








8y sales xxxx
Less reLurns xxx
8y closlng sLock




lnally a ledger may be deflned as a summary sLaLemenL of all Lhe LransacLlons relaLlng Lo a person asseL
expense or lncome whlch have Laken place durlng a glven perlod of Llme 1he upLodaLe sLaLe of any accounL
can be easlly known by referrlng Lo Lhe ledger


1he buslness man ls always lnLeresLed ln knowlng hls neL lncome or neL proflL-eL proflL represenLs Lhe
excess of gross proflL plus Lhe oLher revenue lncomes over admlnlsLraLlve sales lnanclal and oLher
expenses 1he deblL slde of proflL and loss accounL shows Lhe expenses and Lhe credlL slde Lhe lncomes lf Lhe
LoLal of Lhe credlL slde ls more lL wlll be Lhe neL proflL And lf Lhe deblL slde ls more lL wlll be neL loss

8Cl1 A-u LCSS A/C C M8C8 1PL ?LA8 L-uLu
A81lCuLA8S AMCu-1 A81lCuLA8S AMCu-1
1C offlce salarles
1C renLraLesLaxes
1C rlnLlng and sLaLlonery
1C Legal charges
AudlL fee
1C lnsurance
1C Ceneral expenses
1C AdverLlsemenLs
1C 8ad debLs
1C Carrlage ouLwards
1C 8epalrs
1C uepreclaLlon
1C lnLeresL pald

8y gross proflL b/d
lnLeresL recelved
ulscounL recelved
Commlsslon recelved
lncome from lnvesLmenLs
ulvldend on shares
8enL recelved



1C lnLeresL on caplLal
1C lnLeresL on loans
1C ulscounL allowed
1C Commlsslon
1C -eL proflL
(Lransferred Lo caplLal a/c)


xxxxxx xxxxxx


1he second polnL of flnal accounLs ls Lhe preparaLlon of balance sheeL lL ls prepared ofLen ln Lhe Lradlng and
proflL loss accounLs have been complled and closed A balance sheeL may be consldered as a sLaLemenL of
Lhe flnanclal poslLlon of Lhe concern aL a glven daLe

-1- A balance sheeL ls an lLem wlse llsL of asseLs llablllLles and proprleLorshlp of a buslness aL a
cerLaln sLaLe

Ikbotllbol A balance sheeL ls a sLaLemenL wlLh a vlew Lo measure exacL flnanclal poslLlon of a buslness aL a
parLlcular daLe

1hus 8alance sheeL ls deflned as a sLaLemenL whlch seLs ouL Lhe asseLs and llablllLles of a buslness flrm and
whlch serves Lo as cerLaln Lhe flnanclal poslLlon of Lhe same on any parLlcular daLe Cn Lhe lefLhand slde of
Lhls sLaLemenL Lhe llablllLles and Lhe caplLal are shown Cn Lhe rlghLhand slde all Lhe asseLs are shown
1herefore Lhe Lwo sldes of Lhe balance sheeL should be equal CLherwlse Lhere ls an error somewhere

LlablllLles and caplLal AmounL AsseLs AmounL
8llls payable
8ank overdrafL
8eserve fund
CaplLal xxxxxx
-eL roflL xxxx


urawlngs xxxx


Cash ln hand
Cash aL bank
8llls recelvable
Closlng sLock
urnlLure and flLLlngs
Land bulldlngs
aLenLs Lm copyrlghLs
repald expenses
CuLsLandlng lncomes



xxxx xxxx